U.S. Code Section 127 (Section 127 of the Internal Revenue Code or IRC) allows employers to provide tax-free payments of up to $5,250 annually to eligible employees for educational expenses under a “qualified” educational assistance program.
These programs offer mutual tax benefits for both an employer and employees. The amount paid, reimbursed or credited towards tuition or educational expenses is tax deductible for the employer and non-taxable income to the employee. This results in a win-win for both parties.
Educational Assistance Programs traditionally offer employees benefits such as tuition reductions, scholarships for employees (or family members, if eligible)or legitimate educational expenses such as school fees, supplies or books.
Additionally, a provision in the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act) expanded educational assistance programs under IRC Section 127, enabling employers to pay their employees’ student loans with pre-tax dollars up to a limit of $5,250 annually. The Taxpayer Certainty and Disasters Tax Relief Act extended this employee benefit through December 31, 2025.
In order to be considered a qualified program under IRC Section 127, an educational assistance program must:
- Follow an employer’s Educational Assistance plan’s written document provisions;
- Clearly specify what the program money can be used for;
- Be accessible to all employees in a non-discriminatory manner that does not favor highly-compensated employees;
- Require that employees or dependents benefitting from the program be able to substantiate educational expenses defined under IRC Section 127;
- Not provide eligible employees with a choice between educational assistance benefits and other benefits or cash;
- Include payments in excess of the statutory dollar limit or paid outside the permitted time period in the employee’s gross income.
- Notify eligible employees in writing of the available benefits and how to apply for them, and
- Make student loan repayment benefits available to current students and graduates with student loan balances.
An employer can either directly pay an employee’s (or their dependents’, depending on the plan) educational institution or student-loan servicer, or they can pay the employee directly and then potentially request a receipt of employee payments if their specific written plan requires it.
Program limitations an employer may want to consider include employee waiting periods for plan eligibility, immediate pay-back provisions for loans if an employee quits before a fixed period of time.
For more information on steps to adopt an Educational Assistance Program, please view Publication 970 (2021), Tax Benefits for Education | Internal Revenue Service (irs.gov).
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